Business context and reporting period
Selective Insurance Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Its reportable segments are Standard Commercial Lines, Standard Personal Lines, E&S Lines, and Investments. Management describes the period as significantly affected by the COVID-19 pandemic, elevated catastrophe losses, and financial-market volatility.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $776.6 million | $710.4 million | $2,123.8 million | $2,117.6 million |
| Net premiums earned | $694.5 million | $653.6 million | $1,976.9 million | $1,928.8 million |
| Net income | $69.9 million | $56.2 million | $119.3 million | $189.8 million |
| Diluted EPS | $1.16 | $0.93 | $1.98 | $3.16 |
| Combined ratio | 97.0% | 95.2% | 97.4% | 94.3% |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $380.9 million | $316.2 million |
Q3 net investment income was $68.2 million, up from $55.8 million; nine-month net investment income was $158.6 million, down from $164.9 million. Nine-month net realized and unrealized investment losses were $24.3 million, versus gains of $15.3 million in 2019. Non-GAAP operating income was $63.8 million in Q3 and $138.5 million for nine months; the company reported this measure as supplemental, not GAAP.
Balance sheet and liquidity at September 30, 2020
Total assets were $9.51 billion and stockholders’ equity was $2.39 billion. Total debt was $717.6 million, including $167.0 million of short-term borrowings and $550.6 million of long-term debt. Debt-to-capital was 23.1%; long-term debt-to-capital was 18.7%. Short-term investments and cash totaled approximately $381.7 million. Statutory surplus was $2.0 billion. Book value per share was $40.00, compared with $36.91 at December 31, 2019.
Material changes and segment performance
- Net premiums written increased 6% in Q3 and 2% for the nine months year over year. Nine-month growth was reduced by the $75 million estimated premium return accrual and $19.7 million of auto premium credits related to COVID-19.
- The combined ratio worsened 1.8 points in Q3 and 3.1 points year to date, mainly reflecting catastrophe losses of $79.5 million in Q3 and $195.9 million for nine months, compared with $24.2 million and $74.5 million, respectively, in 2019.
- Standard Commercial Lines remained profitable: its combined ratio was 92.3% in Q3 and 95.1% year to date. Standard Personal Lines recorded underwriting losses of $14.4 million in Q3 and $20.3 million year to date, with combined ratios of 119.0% and 109.1%. E&S Lines recorded underwriting losses of $7.3 million and $4.0 million, with combined ratios of 112.0% and 102.2%, respectively.
- Prior-year casualty reserve development was favorable by $25.0 million in Q3 and $50.0 million for nine months. Nine-month investment performance also included $24.5 million of OTTI expense, including $16.3 million on securities the company intended to sell and $8.2 million of credit-loss expense.
Outlook, commentary, and risks
Management’s 2020 guidance was a GAAP combined ratio, excluding catastrophe losses, of 88%–89%; catastrophe losses equal to 8.0 combined-ratio points; after-tax net investment income of $175 million, including $10–$15 million from alternative investments; an effective tax rate of approximately 18.5%; and diluted weighted-average shares of 60.5 million. The combined-ratio guidance assumed no additional prior-year casualty reserve development in Q4. Management reported a 2020 non-GAAP operating ROE target of 11%; nine-month annualized non-GAAP operating ROE was 8.0%.
COVID-19-related items reduced pre-tax underwriting results by $3.3 million in Q3 and $37.4 million year to date, according to management. The remaining estimated premium return accrual was $41 million, with related audits or endorsements expected through the end of 2021. A $10 million estimate for limited property cleaning/disinfection coverage remained entirely IBNR at September 30. The company said it did not expect material business-interruption losses under its standard commercial property policy terms, but noted that coverage litigation and potential legislative or regulatory actions are unresolved. It also cited possible pressure on premium collections, claims costs, investment values, and reinsurance availability and pricing.
Management said it expected to repay the remaining $167 million short-term debt by year-end 2020. The July 2020 reinsurance treaty renewals retained the prior structure but increased treaty-year ceded deposit premiums by $14.3 million, or 17%; the property treaty now excludes communicable disease. Fitch and S&P reaffirmed ratings of A+ and A, respectively, with stable outlooks. The Board declared a $0.25 per-share dividend payable December 1, 2020.
Important facts for investors to verify
- Whether full-year combined-ratio, catastrophe-loss, investment-income, and tax guidance was achieved, including the stated assumption of no additional Q4 prior-year reserve development.
- Actual catastrophe claims and reserve development, particularly given 2020 catastrophe losses substantially above the prior-year period.
- Collections and write-offs underlying the $21 million premium-receivable allowance, and the remaining $41 million COVID-19-related premium accrual.
- Repayment of the $167 million short-term debt due in Q4 2020 and the company’s continuing liquidity and capital position.
- Developments in COVID-19 coverage litigation, potential regulatory or legislative mandates, and reinsurance coverage, capacity, and pricing.
- Investment portfolio credit losses, alternative-investment volatility, and the effect of low interest rates on investment income.